Humility As Trade Policy

January 10, 2000

J. D. Foster, Ph.D.

J. D. Foster, Ph.D.

The United States government has adopted a public attitude towards the economic policies of our largest trading partners that is simultaneously obnoxious and contrary to the best interests of our own economy.

At the recently concluded World Economic Forum in Davos, Switzerland, U.S. representatives once again told everybody else what to do to get their economies moving smartly. The rest of the world is surely tired of this by now, since the U.S. government has taken to lecturing at almost every opportunity.

To be sure, we have reason to crow. We are breaking records for economic growth, inflation is negligible, and projected budget surpluses run into the trillions of dollars. And for their part, the Europeans and Japanese should think back to the 1970s and 1980s before they complain about our high-toned lectures. They didn’t hesitate then to lecture us about our budget deficits and high inflation, or about their own economic wisdom and short-lived “miracles.”

Even so, public admonitions and proddings by the Yankees are not appreciated. As Bundesbank President Ernst Welteke is quoted in the Wall Street Journal, “In Europe, we discuss the problem of disequilibrium in the U.S., but we don’t tell the U.S. what to do about it.” The disequilibrium he was referring to is the huge U.S. trade deficit. It’s small wonder the Europeans keep their opinions to themselves on this score, since fixing our trade deficit might require breaking down trade barriers into, say, Europe, or cutting imports from, say, Europe, which would certainly not help the German economy.

Nevertheless, there are four good reasons the U.S. should tone down its rhetoric. First, arrogant. It’s surely galling for the rest of the world to watch American popular culture become their own, as their children eat McDonald’s Happy Meals, watch American movies and speak American slang. It’s irksome to our allies that they rely on the U.S. military to put out European fires and provide stability in Asia. And it’s bad enough for them to have their economies struggle without watching the United States post a 5.8 percent growth rate in the fourth quarter. Humility has never been an American fort», but now would be a good time to try.

A second reason the United States should be more circumspect in its opinions is that we cannot be sure what works here will work as well abroad. Deregulation, relatively low marginal tax rates, and stiff competition work in the United States. It should work equally well in Western Europe and Japan, but who can say for sure? We thought it would work equally well in Russia, and eventually it will, but we found our initial prescriptions to be naive.

Economic policy is about choices. Many Europeans place a high premium on social justice while fearing the rough and tumble of American-like markets. Most Europeans want far more vacation than Americans would typically take, and they want to work far fewer hours than Americans with no loss in pay. The Japanese, for their part, want a more rigid society than Americans would tolerate. These are not unreasonable choices, but they come with a cost. We should not lecture others for making reasonable choices unless those choices impose costs on Americans.

Finally, why should we cajole our trading partners into adopting more pro-growth policies when it’s probably not in our best interest economically?

The classic answer is that if our trading partners grow more rapidly, their demand for our products and services will grow, and our exports will surge. Given the size of our trade deficit, this seems reasonable, but it misses the point. The goal of trade policy isn’t just to raise exports, but to increase what we can buy abroad for a given amount of what we can sell abroad. No one works just for wages. We work so that we can buy goods and services. If the other guy is willing to give us more for our wages, why should we complain?

In the old days, some would say that the trade deficit depresses domestic employment. Domestic employment is now so strong that the unemployment rate has dropped to levels unimaginable in the old days, and the economy is so strong the Federal Reserve is sure to raise interest rates to knock it down a peg. Encouraging stronger economies abroad to increase our exports to expand domestic employment doesn’t seem a very pressing issue.

While some of the recent U.S. growth is due to increases in employment, much of it is due to rapid and sustained increases in labor productivity commonly attributed to new technologies and the rapid pace of U.S. capital formation. If labor productivity growth in the United States continues to outstrip that of our trading partners, then eventually the underlying terms of trade between the United States and the rest of the world must shift in our favor. U.S. workers will be able to buy more goods, both domestic and foreign, per hour of work, which is as good a definition as any of greater prosperity.

The United States certainly should not inhibit better economic policies among our trading partners. But we should not forget that the pre-eminent goal of U.S. policy should be to enhance the lives of U.S. citizens. One way to do this is to encourage policies that allow Americans to buy more for less. There’s an old saying that goes, if someone insists on being a fool, make sure there’s only one. If our trading partners insist on maintaining anti-growth economic policies, we should just make sure we don’t follow suit.

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